Shell is gearing up for a huge expansion of its carbon-intensive tar sands operation in Canada at a time when it has been struggling to replace conventional reserves.

In an annual strategy update yesterday, Jeroen van der Veer, chief executive, said the Canadian business was at the centre of its wider ambitions to meet growing energy demand - with the high cost of developing Athabasca and other projects easily accommodated by crude prices that hit new highs yesterday of $112 a barrel.

"Canadian heavy oil, where we have 20bn barrels of resources, is a classical new technology and integration play that Shell can do well. Alberta has the potential to become a major production heartland for Shell for decades to come," said Van der Veer, who admitted the conventional reserves replacement ratio had slumped from 158% in 2006 to 17% last year.

The Anglo-Dutch oil group is producing 155,000 barrels a day from tar sands, had plans to raise this to 500,000 barrels and has just formally applied for a licence to enable it to raise that figure to 770,000.

The exploitation of tar sands is controversial because the methods used can be highly water and power intensive as well as being far more carbon intensive, but Shell said it had halved the energy intensity of its tar sands operation in four years.

The Canadian venture is not only opposed by green groups but also not recognised by the Wall Street financial watchdog, the US securities & exchange commission, as genuine reserves. Van der Veer repeatedly talked yesterday about Shell's "resources" rather than "reserves".

Fears that the company's overall oil and gas reserves would be shown to have fallen heavily over the past year proved unfounded, with Shell saying its net reserves were 11.9bn barrels of oil equivalent at the end of 2007, roughly the same as they were the year before.

The reserves issue is sensitive for Shell, which shocked investors and sacked its chairman, Sir Philip Watts, in 2004 after it had been found by the SEC to have exaggerated its reserves by about a third.

The reserves replacement ratio of 17% at Shell compared with a figure of more than 100% at BP for 2007 and was largely attributed to the forced transfer of part of its Sakhalin-2 scheme by the Kremlin. Meanwhile, future reserves and production figures could be hit by problems in Nigeria, where violence flared up again yesterday when Shell attempted to secure some damaged wells.

The group said its overall "resource" base held the potential of 2% to 3% output growth annually but admitted this was "geared toward growth after 2010".

Richard Griffith, energy analyst at Evolution Securities, said in a research note: "Much of the update is a restatement of the strategy that has been in place since 2004 and therefore the issue going forward is really about delivering this growth - an area in the past where Shell (and BP) have disappointed."

Shell's chief executive, whose annual salary, bonus and cash benefits rose to £3.2m last year from £2.5m in 2006, said yesterday there was no major problem with world oil supply and no particular reason why prices had hit an all-time peak. "From the physical point of view there is no high alarm," he said. "It's difficult to understand why the oil price is where it is. No tankers are waiting in the Middle East. There are no queues for the retail stations here."

Van der Veer had no soothing words for motorists and other oil users, saying prices could be expected to remain relatively volatile for a "sustained period" without any change in the underlying market.

The oil company admitted yesterday that it had been contacted about potential violations of the US Foreign Corrupt Practices Act, which could lead to fines. The issue surrounds the use of a freight-forwarding firm, Panalpina, and involves suspected bribery in Nigeria, Kazakhstan and Saudi Arabia.